Lowe's Dividend – Slowing or Growing?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the home improvement space, there are two huge chains that dominate the industry, Lowe's (NYSE: LOW) and Home Depot (NYSE: HD). Lowe's stock was being beaten down just a few months ago and the stock sold off, as the company announced its intentions to return more money to shareholders through dividends. The reaction was negative because investors assumed that if dividends were being pumped up that growth had slowed down. This naturally begs the question, how much can Lowe's pay in dividends, and is this growth slowing down or speeding up?
At today's prices, Lowe's pays a dividend of about 1.93%. The company's future growth is expected to come in at over 15% and you can buy the shares for about 15 times forward earnings. While competitor Home Depot pays a slightly higher dividend at about 2.37%, the shares also trade at a bit of a premium, at nearly 17 times future earnings. With Home Depot expected to have almost the same growth rate as Lowe's going forward, this higher yield and higher P/E would seem to indicate that Lowe's is fairly valued.
Now what about that dividend? The first question investors should ask themselves is, can the company afford to pay their existing dividend? On that score, Lowe's looks to be in pretty good shape, but there is a trend that is a little worrisome.
You can see that while the change is slight, the company is paying out a higher percentage of its free cash flow year-over-year. With a under 26% payout ratio, this isn't a major issue yet, but investors should keep an eye on this figure. For now, based on the company's cash flow generation, the dividend appears safe.
What about dividend growth? Looking at the last 10 years, you can see that Lowe's dividend growth is tied to the general economy.
When the economy was growing, Lowe's increased their dividend by a large amount. In fact, in the six year stretch from 2003 – 2008, the company grew its dividend by an average of over 40% per year. However, reality set in with the Great Recession and in 2009 the company offered one of their lowest increases of just over 6%. As the economy began to recover, Lowe's has returned to increases in the double digits again. So the big question is where do we go from here? The answer is, it depends on what happens with the economy.
I personally believe that the recovery is real but slow. If that is the case, Lowe's should be able to meet earnings projections going forward of 15% growth. Given the fact that Lowe's only pays out about 25% of free cash flow, I would suggest that this payout ratio could easily grow. Lowe's has less leverage than Home Depot, which means the company shouldn't be hampered by debt issues. Given this combination of 15% expected EPS and cash flow growth, a low payout ratio and less debt, I would suggest that 12-18% dividend increases should be within reason for at least the next five years.
Lowe's current tagline is “Never Stop Improving.” I'm sure that investors would be more than happy, if Lowe's “improved” their dividend by double digits for the next several years.
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